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FDIC May Need Loan to Cover Bank Failures

Posted on 27 Aug 2008

The Federal Deposit Insurance Corp (FDIC) says it may have to get a loan from the Treasury Department to cover short-term cash-flow reductions caused by reimbursing depositors immediately in the wake of a bank failure. (See related story, Number of Banks in Peril Up 30 Percent.) When the failed bank’s assets are sold, the loan would be repaid.

Said FDIC Chairman Sheila Bair, "I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses." Bair said such a scenario was unlikely in the "near term."

She said she did not expect the FDIC to take the more dramatic step of tapping a separate $30 billion credit line with Treasury, which has never been used.

Still, with a rise in the number of troubled banks, the FDIC's Deposit Insurance Fund that is used to repay insured deposits at failed banks has been drained.

The last time the FDIC had borrowed funds from the Treasury was at nearly the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks closed their doors.

The fact that the agency is considering the option again, after the collapse of just nine banks this year, speaks volumes about how much Washington regulators are concerned about the weakness of the U.S. banking system in the wake of the credit crisis.